Four ways networks are becoming important.
This article first appeared on TheNextWeb
Online networks are becoming increasingly important in the context of business today. In this era of social participation, the consumer is no longer a passive recipient of goods and services but is actively involved in creating value. Online platforms that allow external participants to co-create value are rewriting the rules of competition. As demonstrated by the iPhone’s disruption of the carriers’ business model, businesses will either have to embrace platform models or stand the risk of being disrupted by new entrants.
Business owners and managers need to rethink their business model and restructure operations to appropriately leverage the competitive advantage that networks provide.
The industrial age has conditioned us to think linearly about business. Manufacturing businesses create value by sourcing inputs, transforming these inputs and pushing the finished products into channels. The services industry scales solutions by employing more people. Our traditional models have relied on creating new inventory within the business to solve customer problems.
The internet allows the creation of online platforms that enable the creation of new sources of inventory external to the business. While the industrial approach to scaling supply involves scaling business operations, the platform approach focuses on growing an ecosystem of external ‘co-suppliers’.
Traditionally, the transportation problem has been solved by creating and selling new cars (Ford) or adding more cars to a fleet (Avis). A platform-based approach like Lyft connects commuters with vehicle owners interested in making some extra money. In doing so, an entirely new source of supply is created. Avis’s acquisition of Zipcar is a testimony to the growing importance of a platform-based approach.
Hotel chains solve the traveler accommodation problem by creating new hotels around the world. Airbnb solves the same problem without investing in any inventory within the business. Instead, Airbnb enables anyone with a spare room and a mattress to run their own BnB and benefit from a global market of travelers.
Platform models are difficult to get off the ground because the business does not have direct control over the creation of inventory and many platforms fail in spite of investing in technology because they fail to generate supply. However, platforms that have succeeded in reaching critical mass have often disrupted traditional businesses and created entirely new consumer markets.
‘Work’ has traditionally constituted value-creating activities performed within the organization. This traditional view of work is based on the fact that the cost of interacting and coordinating workflows is much lower when carried out within the organization. However, the rise of the internet, and more recently the cloud, brings down these coordination costs and enables value to be created outside the organization.
There are two ways to rethink work in the context of your business:
1. Leveraging third-party platforms: The rise of services marketplaces like Elance, Upwork and, more recently, Gigwalk, has powered the growth of the freelance economy. Adobe’s recent acquisition of Behance underscores the importance of platforms enabling the freelance economy. The cloud-enabled workforce is a model gaining gradual traction and is likely to affect both core as well as support functions in any business. Tapping into this distributed workforce can enable a business to get work done, without the overheads associated with an in-house workforce.
2. Creating an ecosystem of producers: A far more disruptive, though challenging, way to leverage networks is to restructure your business as a platform connecting producers and consumers directly. The mobile applications industry is already being restructured around this new normal. While app developers traditionally worked for companies like Nokia, the rise of the iPhone and Android app store, coupled with the downsizing of companies like Nokia has restructured the concept of work in this industry. These former in-house app developers for Nokia now participate on the iPhone and Android app store.
Businesses that leverage this strategy need to create the right incentives for the external producers. Apple, for example, succeeded with the iPhone app store because it provided a better revenue share than the carriers.Threadless and YouTube have also succeeded in redefining the role of the supplier and restructuring the way work was done in the industries they disrupted.
A platform approach can enable a business to leverage an army of external talent to create far richer and diverse products than would have been possible in-house. The advantage that comes from leveraging an ecosystem of producers can never be replicated in-house as has been demonstrated in the mobile applications industry.
In all likelihood, this pattern could serve as a blueprint for the disruption of other industries as well. With the rise of 3D printers, even manufacturing-intensive industries could be disrupted by platforms. The ability to buy designs and print out objects could reshape the way companies design and deliver products.
Traditionally, advertising has served as the dominant model for creating awareness about an offering. Advertising, however, has been neither sustainable nor scalable as a growth strategy. Scaling advertising requires an additional infusion of money, and may, in fact, yield diminishing returns in certain cases.
Advertising works with traditional media because it is a natural fit for broadcast channels like TV, radio and print. The Internet in general, and social media in particular signals a shift from channels to networks and creates new opportunities for developing sustainable and scalable growth strategies. The rise of viral marketing places the consumer at the center of your growth strategy and makes every consumer a potential distribution partner. Viral marketing provides a highly scalable model of organic growth.
However, this new medium needs to be leveraged with caution. Companies that have misused viral marketing (e.g. Facebook apps sending unsolicited invites repeatedly) have lost engagement from consumers.
While the attractive ROI of viral marketing is well-known, its execution is often erroneously reduced to putting up share buttons and offering incentives to users to share content/information. Instead, the companies that have succeeded with leveraging viral growth have employed one of two strategies.
1. Creating shareable content for third-party platforms: Businesses have used contests, deals and other forms of shareable content to get users to spread the word. Media outlets grow by creating shareable content. BuzzFeed is a company that bases its entire operation around creating content optimized for sharing. Editors at BuzzFeed scour sites like Reddit to identify content that is already viral. They then repackage the content, leveraging best practices that they’ve researched and implemented in the past, to create new content that can spread virally.
2. Providing a platform for users to create shareable content: Every time a video on YouTube or a project on Kickstarter goes viral, the underlying platform also gets exposure and greater adoption. Social commerce businesses use this strategy when they allow users to create wishlists and collections to share with their friends.
Managing talent within the firm has become an important aspect of business thinking in the knowledge economy. However, in an age where users are creating value on online platforms and ‘work’ is getting redefined, the concept of managing human resources needs to be extended beyond the boundaries of the firm.
Businesses need to focus on user management the way they have focused on employee management so far. In the avatar of a community manager, businesses are already extending HR principles to factor in the context of the user.
Incentives: Producers outside the firm need incentives for participation in the same way that employees do within the firm.
Tools: Producers outside the firm need the tools and infrastructure to operate just as employees within the firm do.
Fairness: Producers outside the firm need a fair working environment just as employees do within the firm. Hence, a platform where users create value should have a democratic model of recognizing user contributions.
While a traditional designer clothing line has designers within the firm creating designs, a platform like Threadless leverages external designers to create new T-shirt designs. These designers have the intrinsic incentive of getting their work recognized and appreciated through a rating mechanism and the extrinsic incentive of receiving a revenue share on T-shirt sales if their designs are selected for printing. Moreover, the community rating mechanism ensures that designers get a fair shot at success. Threadless focuses on incentives, tools and fairness and caters to the same motivations that any designer clothing line would for its designers.
The rules of competitive advantage are changing. While traditional industry saw scale as a function of firm size, the new definition of scale is based on the size of the existing ecosystem that the firm succeeds in building. YouTube is smaller than traditional media houses, Airbnb doesn’t need the in-house scale of Holiday Inn but serves more travelers every day. In an age of networks, your firm’s competitive advantage will be determined by how well it leverages the above factors to create an ecosystem of value creators around it.
The theory of everything APIs and Platforms
Freemium networks may offer the best of both worlds: Network effects and revenue.